Why Microsoft's New EU Fine is Just Fine
News that Microsoft is to be hit with yet another fine from the European Union has naturally attracted plenty of attention, but it has also raised the old questions of whether such interventions by governments are justified or even do any good.
Some seem to believe that the market, inherently red in tooth and claw, should be allowed to sort itself out without any kind of government intervention. But as a convicted monopolist, Microsoft has already been found to have abused its dominant position, so the idea that it should be allowed merrily to do the same wherever else it fancies just because it can, with whatever collateral damage that may cause to open source projects, hardly seems in the public interest. By all means let it compete – but on a level playing field.
The second question – whether such fines have any effect – is more complex. Some have pointed out that €899 million, although a huge sum for anyone else, is pretty small change for Microsoft. It might therefore regard the prospect of fines as simply another cost of doing business the Microsoft way, where the benefits of failing to comply quickly with court rulings outweigh the risk of a little wrist-slapping. I think that was probably true in the past, but the world has now changed rather radically in two ways, which together may be enough finally to make Microsoft think twice about taking this course in the future.
The first factor is Microsoft's bold move to take over Yahoo. Leaving aside the fact that huge mergers rarely deliver – just think of the AOL/Time-Warner fiasco, which essentially destroyed AOL as a major Internet player – there is the inconvenient fact that Yahoo is almost as dependent on free software as Google. Microsoft, of course, is still hugely sceptical about open source, whatever lip service it may have paid recently to the idea of openness and interoperability.
As a result, a combined Microsoft-Yahoo operation will be a mixture of digital oil and water: the only question is whether Microsoft will try to change enough to manage Yahoo's fundamentally different approach to infrastructure, or whether it will engage in an insane and possibly suicidal attempt to rip the heart out the heart of Yahoo's engineering and replace it as a matter of policy with its own technology. Whichever option it chooses, bringing Yahoo on board is going to cost a huge amount in terms of money and – perhaps even more critically – management time.
That would be bad enough, but on top of that, Microsoft will, for the first time, be taking on a huge amount of debt to help pay for Yahoo if the acquisition goes through. So as well as a hugely-stressed and possibly warring management structure, Microsoft will also have to cope with interest payments on its debt, which will need to be funded out of earnings. In addition, those earnings have to rise pretty steeply to justify the whole Yahoo adventure, or shareholders will start to express their dissatisfaction.
Against this background, the last thing Microsoft needs is fines. Remember that we are not in fact talking about “just” €899 million here: as the EU commissioner Neelie Kroes noted during the press conference announcing the latest fine, the cumulative amount that Microsoft must pay the EU is €1.6767 billion. The fact of the matter is that if the Yahoo deal goes through, Microsoft will be strapped for cash, and paying out over one and half billion euros for “nothing” will hurt.
This means that the threat of further fines is not one that the company can contemplate lightly. Moreover, that threat is very real – and here we come to the second major shift that I referred to above. From being something of a joke, perceived as a bureaucracy in search of a role, the European Union has emerged as the dominant regulatory body for the world of computing (and probably beyond).
After a couple of pretty weak results – for example, requiring Microsoft to produce a version of Windows without Windows Media Player, which of course, nobody wanted – the EU hit its stride when it forced Microsoft to open up its network interoperability protocols. Proof of the EU's power in this area was provided by Microsoft itself last week, when it made its various commitments on openness. It concluded:
The interoperability principles and actions announced today reflect the changed legal landscape for Microsoft and the IT industry. They are an important step forward for the company in its ongoing efforts to fulfill the responsibilities and obligations outlined in the September 2007 judgment of the European Court of First Instance (CFI).
“As we said immediately after the CFI decision last September, Microsoft is committed to taking all necessary steps to ensure we are in full compliance with European law,” said Brad Smith, Microsoft general counsel. “Through the initiatives we are announcing, we are taking responsibility for implementing the principles in the interoperability portion of the CFI decision across all of Microsoft’s high-volume products. We will take additional steps in the coming weeks to address the remaining portion of the CFI decision, and we are committed to providing full information to the European Commission so it can evaluate all of these steps.”
Moreover, it even goes beyond those requirements, applying the EU's demands to other major products. Obviously, it is not doing that out of the goodness of its heart: as Andy Updegrove has noted, this looks like a fairly blatant attempt to sway those taking part at the ISO meeting currently taking place in Geneva.
But the critical thing is that Microsoft frames its actions in terms of fulfilling its “responsibilities and obligations” to the EU, and that it explicitly calls this a “changed legal landscape.” That is, it knows now that all its actions will be looked at with a very sceptical eye by an EU that has not only hit it for nearly €1.7 billion, but which has made it quite plain that it will do it again – and again and again, if necessary.
What makes this particularly important is that the EU has already initiated two new formal antitrust investigations “in order to verify whether Microsoft is complying with the principles established by the Court”:
One of these investigations focuses on the alleged illegal refusal by Microsoft to disclose sufficient interoperability information across a broad range of products, including information related to its Office suite, a number of its server products, and also in relation to the so called .NET Framework and on the question whether Microsoft's new file format Office Open XML, as implemented in Office, is sufficiently interoperable with competitors' products.
The second investigation concerns allegations of tying of separate software products, including Internet Explorer, to the Windows PC operating system.
And that's not all. On the subject of Office suites, the Danish Unix User Group has recently filed a formal complaint with the EU Commission:
The Danish state represented by ITST has made ECMA 376 [OOXML] mandatory from the 1st of January 2008 for cartain procurements in the Danish state, thus making the procurement unacceptably favouring a specific company and their product, and setting their competitors in the field of office software at a competitive disadvantage.
It is noted that ECMA 376 is not an international standard. Furthermore it is noted that ECMA 376 contains a number of specifications that are undocumented about specific information on implementation of MS Office. And it is noted that a report procured by ITST itself found that ECMA 376 cannot be said to be entirely open, which has been a condition of the Danish Parliament (Folketinget) for accepting the regulations.
It is also noted that the regulation does not contribute to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, as other solutions for office software can be as cheap or even cheaper, and there thus is no benefit for consumers, rather the contrary. The regulation may on the other hand lead to keeping the de facto near monopoly, that Microsoft Office has in the Danish state.
Whatever happens with OOXML and the Danish complaint, the key gain for openness has already been achieved. Unable to regard fines from the EU with indifference or even contempt, Microsoft will have to start really playing by the rules. Finally.
Glyn Moody writes about open source at opendotdotdot.